I think one way to look at businesses in general and retail in particular could be through the customer lifetime value framework. Retailers which incur very less customer acquisition costs and very low customer retention costs have a very high customer lifetime value. One also needs to add the triad of scale, entry barrier and pricing power on top of these costs.Retailing is all about profitable volumes at a unit level while acquiring and retaining customers. Its a very harsh and brutal business to be in and more so if you have a fickle customer base.

I can see many similarities of retail with real estate - where customer acquisition and retention costs are very high. There are problems of scaling up, virtually no entry barriers and limited pricing power. In such businesses capital ultimately flows to the customer and not the shareholders. Though there are exceptions in every business.

I did attend the AGM yesterday, however did not take down notes. I reached a few minutes late and could only catch the end of the Chairman Ramesh Damani’s speech. They calmly took all the questions and praise and Mr. Noronha answered all together. The general takeaway from the Q&A was that:

Business is good and there is scale.

Focus is on Dmart and Dmart ready. Not looking into new segments like jewelry or other formats.

They have a good team which understands the business. They study the areas on various parameters before putting up a store. (South Mumbai is not feasible for Dmart store. They have started with Dmart ready there.)

No forward looking statements.

The different parameters like revenue per sq ft are a result and not something that is pursued. Happy with the performance.
So I would say no surprises there.

Management is clear with goal setting & strategy to achieve it.
Goal is to expand 1st where they have a significant presence, understanding of the customer pulse & scale the business on hub & spoke model in that geography rather than having presence pan India in the near future.
Execution methodology is which clearly differntiates them from others is that they wanted to do what they excel at & with a great success rate rather than trying multiple things parallel with caveats in execution with totally focussing on no or minimal margin of error.

Not focussing currently on Private level (Primera) scalability in the near future.

Started Pilot etailing with DMart Ready Store concept with small sample size in Mumbai only & intention here is to gauge the feasibility & sustainability to enhance customer acquisition without having impact on margins but not focussing much currently on this. Have booked loss of 48 Cr this year in etailing.

Our moat is our flawless execution with gaining perfection in whatever we do rather than trying multiple things in parallel. We totally focus on gauging customer pulse & consumption behaviour based in the demographics. Hence store in Mumbai & Hyderabad will have different product mix based on the consumer taste, liking & lifestyle.

Opportunity Size is too huge that everybody can coexist but survival of the fittest theory will imply in long run with consistent & sustainable growth.

Break-even of a new store varies ranging from. 6 Months to even 5 years but investment is made for new stores considering the long term view. Even the longer gestation periods ensure consistent profitability in longer run.

No acceptance of Sodexo or similar co-branded PLCC as they charge nearly 4% & leaves a huge dent on our margins. So no interest in more customer acquisition sacrificing margins. Customer Satisfaction with deep understanding of customer behavior, macros such as Per Capita GDP, Population mix, demographics ensure customer loyalty & new customers penetration further.

No intention to target affluent customers with high profile DMart stores.

Not interested to mark presence in areas where Real estate price is sky rocketing & customer conversion ratio is not at our. Example is South Mumbai

Are we confusing cause with effect here? Dividend policy et al is outcome of growth returnz and not other way around. Please appreciate a correlation is not same as leading indicator.

bheeshma:

the coming quarters earnings growth will most certainly revert to actual roe - one doesnt where it will settle but an average of 18% and 43% indicates 29%. This gives a rough sense of steady state growth in earnings one can expect going forward.

Gary, it seems you don’t understand it properly. It is nothing about cause and effect here , topic is about how to find incremental ROE for a dividend paying company . calculating incremental ROE for a capex led (0 dividend provider) growth is bit different from dividend paying company .
Please check DDM over Internet and study ,it will help you to understand. Also there are many books are written about it .

Hi @morigh82 - I understand DDM. The point I made is not on valuations but cause versus effect. Growth is function of market opportunity and execution against well laid strategy…rest are either lagging indicators or at best enablers.

Saw first time DMART Ready is giving 5% cash back offer in Credit Cards . DMART Low price and extra 5% cash back is lucrative but will there be any pressure on Gross margin ?

Most of the times when there is a card (credit/debit/prepaid) offer it is usually funded by the issuing bank in this case HDFC. The cashback if any will be credited to against the customer’s debit/credit card or appropriate discount given.

Banks run these offers to increase spends or increase activation and even get new acquisitions.

DMART Low price and extra 5% cash back is lucrative but will there be any pressure on Gross margin ?

As @deevee mentioned, it is likely to be funded by HDFC Bank. Other point to be noted is since this is online or store pick up sale, the cost tend to be lower than for the same amount sold in the store. Further this is a great way of increasing visibility and sales through this channel.

Dmart is present in 10 locations in India ( have clubbed AP & Telangana, MP & Chattisgarh ). Of these 10 locations , 50% or 5 are ones where they have recently entered <=2 years ago.

These 5 currently form ~9% of total store count ( 13/155). Dmart has a good record of scaling once a cluster is stablized e.g Telangana/AP where it has grown rapidly . One can expect similar something in these 5 locations.

Somewhat of a concern is the low per capita income in some of these locations - much lower than the locations in which mature stores are present. However most locations are well above the India average.

On a different note, the low per capita income also indicates that sometimes investors in B2C businesses may overlook the fact that opportunity sizes should be tied to per capita income. Even in more prosperous states like Maharashtra we have a per month income of 20-22k, of which 50% is spent in private consumption - which matches with the bill cut data provided by Dmart.

Yes you are right, customers from low per capita regions are likely to be even more price conscious and value seeking but since they will have a lower wallet size there may be unique challenges on volume, pricing and margin fronts.

Vmart has done well retailing fashion for budget conscious individuals. Fashion retailing has high gross margins and high expense ratios. Dmarts model is based on low expense ratios and low gross margins, so both are fundamentally very different ways of doing business, though both yield the same net margins roughly.

The broader point is that economic conditions are not same in different regions of india and as one moves down to the bottom of the pyramid scaling becomes incrementally difficult as the size of wallets become thinner and thinner.

I may be wrong here but i assume that as a business if you are trying to grow in low per capita regions with a high expense structure, you may run into trouble as the per capita limit will not allow you to grow topline as fast as you wish and the high expense structure will strain your cash flows. So from that angle, dmart seems to be well structured to tackle that challenge.

One thing which has not been discussed is the ability of this stock to hold up, even during major correction. This is second correction this year where, it has stood the ground or even gained against the market correction. It is acting like a defensive stock.